All posts tagged European sovereign debt

The cost of insuring European sovereign and corporate debt against default rose Wednesday, after a meeting Tuesday between French and German leaders failed to deliver the crisis-busting initiative for which financial markets were hoping.

German Chancellor Angela Merkel and French President Nicolas Sarkozy said a mixture of increased economic coordination and tighter fiscal discipline would help restore investor confidence in the euro zone, but also said it is too early to introduce common euro-zone bonds.

“Any step closer towards a fiscal union is a welcome step,” said Daiwa Capital Markets analyst Tobias Blattner. “But what was proposed yesterday was only a tiny step.”

In credit markets, the disappointment helped push indexes wider for a second day running after the extreme volatility of last week.

While all appears sanguine in the US and we await word on the latest chapter in the Greek tragedy, European sovereign-debt yields are still rising, notably those of bigger, more-systemically important sovereigns than Greece.

This is another sign, as if any were needed, that the risks are still high.

These spreads over German debt are steadily grinding toward their 10-month highs, which Bank of America Merrill Lynch rates technical strategist MacNeil Curry calls key resistance levels we should all be watching:

Italian and Spanish 10yr spreads are approaching their 10month range highs at 200bps and 283bps, respectively. THESE LEVELS ARE CRITICAL (at the risk of stating the obvious) as a break would result in a resumption of the widening trend and would point to contagion, likely have disasterous (sic) results not just on the euro. But on risk assets generally. To be sure, we are not convinced they are going to break, but we believe these levels MUST be respected and watched closely.

Wall Street’s chattering mass of strategists are turning their attention to the ongoing uncertainty over Greece Monday morning.

Over the weekend, sundry continental muckety-mucks once again put their heads together and, after hours of beard-stroking and grave nodding, made the tough decision to, wait for it … delay an important decision! That decision has to do with the parameters of a fresh bailout package for Greece. They’ll wait until July to flesh out the details.

Some argue that the delay is a good thing, as it allows the Greek political classes some more time to try to develop some sense of national consensus that can accept the pretty deep cuts that those writing the checks are demanding in exchange for the bailout cash. Here’s a round-up of what we’re reading:

BNP Paribas Foreign Exchange Research: Risk appetite suffers a slight setback this morning on comments suggesting that a final decision on Greece is likely to drag out for a while yet. Belgian FinMin Reynders said that the decision on the next tranche of aid for Greece will be taken in early July, and will be “based on the Greek parliament’s decision.” The Eurogroup statement said that “national unity is a prerequisite for success” of any assistance package. Eurozone FinMins reiterated their position on Greece saying that Greece had to approve tougher austerity measures before a final decision is made on any further EUR12bn in loans. The next trance of the EU/IMF aid would be paid by mid-July.

Charles Mount, Knight Research: European finance ministers yesterday decided to postpone the disbursement of the next €12B tranche of the original EU/IMF bailout package to Greece until mid-July, raising pressure on the indebted government to pursue austerity measures. European leaders also put off a decision on its second round of aid until next month. While foreign pressures for Greece to tighten its finances increase, the government faces continued protests and opposition within parliament. Today marks the beginning of the parliamentary debate over a vote of confidence for Prime Minister Papandreaou’s government, which will be concluded by Tuesday night.

Camilla Sutton, Scotia Capital: After weekend meetings, Eurozone finance ministers did not agree on a new package for Greece, choosing instead to push it off until the Eurogroup’s July 11th meeting. The short statement noted that they support both official and private voluntary roll-over of exiting debt, avoiding a default for Greece and that political parties in Greece need to support austerity. Later this week the heads of state will meet (EU summit) and will likely discuss changes to the EFSF (including enlargement), the ESM and the current situation in Greece. Later this month the …

For European financial leaders, it’s potential pain in Spain that weighs mainly on the brain.

Check out the spread between yields on Spanish 10-year bonds and their German counterparts, long considered the safest in the Europe.

(Short explainer: Spreads are the difference in the higher interest rate a less-credit-worthy country such as Spain has to pay to borrow in the bond market, compared to Teutonic teetotaler Germany. The higher the spread = more risky Spain looks compared to Deutschland.)

At last glance, Spain has to pay 240 basis points – or 2.40 percentage points – more than Greece in the markets. It’s been worse than that over the past year, with the spread as high as 284 basis points or “beeps,” back in late November 2010.

But today’s jump in spreads is pretty big. At last glance, it’s up more than 15 basis points, one of the bigger jumps this year. Although, not as big as the more than 30 basis point jump – according to data from Tradeweb — seen on April 18, when a Spanish debt offering went over like a lead balloon.

Put simply, Spain is a big deal. If the markets start to lose confidence in such a major European economy, that might market yet another fresh phase in seemingly never-ending fallout from the financial crisis.

Here’s another reason the financial markets are having a good time of it today. For now, the worst case scenario for euroland — that Spain would follow fiscally profligate countries such as Ireland, Greece and Portugal to bailoutsville — doesn’t look likely. At least if you take the signals being sent by the bond market at face value.

Here’s the prices for the two-year bonds of Portugal and Spain over the last year. You can see that recently, as Portugal was forced to request aid from the euro bailout fund — the EFSF — the prices for its paper dove. Meanwhile, the prices for Spain have stayed stable. That’s a good sign.

But there’s reason to take some of these signals with a healthy bit of skepticism. The sovereign debt markets are not exactly paragons of free market capitalism at the moment. For example, the Federal Reserve has been buying tons of debt from the U.S. Treasury — effectively creating money to do it. (That’s what we call “quantitative easing” or QE.) The ECB is also buying bonds. Although, the central bank says that it isn’t creating money to do it and is keeping the overall money supply stable. But the bottom line is that the ECB is likely buying Spanish debt so this isn’t exactly a clean read on what the appetite for Spanish debt is from private investors. Still, it’s a lot better than seeing the prices for Spanish debt nosedive, which might indicate that the European debt crisis in entering a new, and perhaps more dangerous, phase.

The debt insurance costs for Portugal and Greece rose after their credit ratings were downgraded by Standard and Poor’s Corp.
The S&P move brought its rating on Portugal to one notch above junk status, and its five-year credit default swap spread felt the effects of the decision more than Greece, which S&P already rated in junk territory.

Portuguese government bonds plunged after the collapse of the country’s government heightened speculation the nation will be forced into accepting a bailout from the European Union and the International Monetary Fund.

Market participants are nervous about Portugal’s ability to meet EUR4.899 billion of bond redemptions in June.
However, the country is widely expected to have enough cash to meet EUR4.227 billion in bond redemptions plus additional coupon payments in April, after it made progress cutting its deficit and raised funds through a bond syndication last month.

Take a look at the spreads between Irish debt and the supersafe European benchmark, Germany. The wider the spread, the wider the implied concern about the credit worthiness of Ireland. And you can see that it’s now hitting levels higher than where we were during the worst of the concerns about Ireland back in late fall 2010. Prices for credit default swaps on Irish debt, essentially insurance on Irish debt — are back up to levels last seen during the fall too.

Portugal failing to agree on austerity measures will force the country into the EFSF putting Europe and the IMF in charge of organising fiscal consolidation. Hence, form a FX point of view Portugal does not really matter. Instead, we put Ireland back on the radar screen. Rumours Allied Irish defaulting on the 29 March coupon payment has been denied by the bank. However, the new Irish government is on a confrontation course with the EU. While Ireland desperately needs the cost of EFSF funding reduced it will not give into demands to increase its corporate tax. Instead, Ireland will threaten withdrawing sovereign bank guarantees which will put balance sheets of those institutions under pressure having Irish bank bond exposures.

While the European policy response, national austerity and reform programs, and economic recovery could mark “the beginning of the end” of the crisis, failure to deliver fiscal consolidation will exacerbate concerns about solvency and probably lead to sovereign ratings cuts, Fitch said.

More solid sovereign debt auctions out of Euroville, with Spain and Italy successfully selling long-term government bonds. But the decent sales have not had the same positive impact that Portugal’s reasonably okay debt sale had on Wednesday.

Investors continue to fret about the euro-zone’s debt woes, with Ireland and Greece already in the rescue ward. Many fear Portugal could join them, in which case Spain and Italy are considered the next likely targets. Thus, their debt auctions are being carefully watched to determine how the crisis might unfold.

Spain hit its maximum target with 3 billion euros in five-year bonds sold. The yield rose to 4.542% from 3.576% in the previous similar auction on Nov. 4. Still, that yield came in lower than where Spanish five-year yields were on the secondary market, a small victory for Madrid.

Meanwhile, Italy sold 6 billion euros of five-year bonds, fetching a yield of 3.67%, which was up from 3.24% for a similar auction on Nov. 12.

Stocks in Europe are little changed, with France and Germany higher and London lower.

LONDON–The cost of insuring debt issued by financially weaker euro-zone sovereigns mostly fell in early trading Tuesday, after the European Central Bank bought bonds issued by some of these sovereigns Monday.

Portugal saw the biggest drop. Its five-year sovereign credit-default swaps were 0.1 percentage points tighter, according to one trader, at 5.35/5.55 percentage points, although the wide bid-offer spread indicates that trading activity is limited.

LONDON–The cost of insuring European corporate and sovereign debt against default fell early Tuesday as strong gains in U.S. stocks overnight boosted confidence that the global economy is strengthening.

Shortly before 3:00 a.m. EST, the iTraxx Crossover index, which allows investors to buy or sell credit protection on 50 mostly sub-investment grade European corporate borrowers, was 0.09 percentage points tighter than late Monday, at 4.26/4.30 percentage points, according to index owner Markit.

The SovX Western Europe index of 15 sovereigns was 0.0125 percentage points tighter than Friday’s close, at 2.045/2.07.

Why travel for the emerging markets experience when you find it from comfort of your own continent?

European hedge funds cut the dollar value of trades in developing-country bonds by 15% in 2010. At the same time, they more than doubled their involvement in trading of G-7 government debt, according to a survey of over 1,000 fund managers from hedgie consulting and research firm Greenwich Associates.

In 2010, the BRIC countries captured the attention – and capital – of hordes of institutional and retail investors this year. But for the fast-moving hedgies, many of whom are clustered around London’s Marlyebone section, seem to be finding better beta in the increasingly high yields on European sovereign debt.

Hedge funds still accounted for 49% the emerging market fixed income trading in Europe this year, but that’s down from 58% of the volume in the asset class for 2009. They ratcheted up their quotient of trading in government debt and covered bonds to 10% of all transactions in 2010, up from just 3% in the previous year, Greenwich said.

European hedge funds also comprised a larger portion of all trades in high-grade credit, junk bonds and asset-backed securities, while playing less of a role in the trade of leveraged loans.

Across the ponds, North American hedge funds accounted for almost 20% of all government bond trades in 2010, up from just 5% the previous year, according to a survey Greenwich published in September. They also cut back their role in emerging markets bond trading to 7% of the total from 11% in 2009.

Portugal’s Treasury and Debt Management Agency sold €500 million ($669.1 million) of T-bills at the shortest end of the yield curve, at an average yield of 3.403%, up 87% from 1.818% at the previous three-month T-bill auction Nov. 3. The bid-to-cover ratio, which indicates demand, fell to 1.9 from 2.2 previously.

The auction results come just hours after Moody’s Investors Service Inc. warned it may downgrade the credit rating of Spain, which plans to auction up to €3 billion in government bonds on Thursday.

Investors are closely watching the government debt tenders in Spain and Portugal amid fears that spiraling borrowing costs could eventually lock out the two countries from the market and force them to seek external help. Government officials from both countries have expressed confidence that such a situation won’t arise, but investors are on guard for any sign of funding weakness.

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